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Oil Prices and Houston’s Economy in 2009?

Harry S. Truman once demanded, “Give me a one-armed economist.” Evidently his economic advisers couldn’t offer straightforward answers, beginning a string of caveats with “On the other hand…” Trying to make sense of the range of Houston 2009 economic predictions brought this quote to mind.

In the same article, the Houston Chronicle shows us an alternate view from economist Dana Johnson of Comercia Bank. He points out that Houston is less susceptible because our housing market is not as artificially inflated compared to the rest of the country. Perhaps Houston area consumers will remain more confident. (Consumer confidence… lack of confidence is a negative feedback loop when in an economic recession; excess of confidence is one cause of the problem in the first place, i.e. scarcity of thrift.)

I’m not an economist, however, I do follow economic developments. As such, I’d like to point out that the Houston economy was quite robust in March 2007, a month where oil dropped below $60 a barrel. We should take some measure of comfort in that. Regardless, we know that dramatic price decreases often result in producers reducing supply by dialing back production. Reducing oil and gas production negatively affects the labor and suppliers. Watch rig counts and production levels.

In addition, the difference between $60 and $145 is some amount of dollars expected to flow through to local companies as profits that, to some extent, were reinvested in the local economy. We lack that today.

Of greater concern, though, is the future of long-term projects and other capital investments made by energy industry participants. We have to ask ourselves, which business decisions were made that rely on high energy prices for net present value (NPV) positive results? What projects were initiated during the run-up in the price of oil through July 2008 when oil topped $145 a barrel? Which (not whether) of those projects will be put-on hold or abandoned?

“To manage their cash, some midsize energy companies have begun trimming their capital-spending plans. So far, the large global companies are maintaining planned spending, though they are delaying certain projects in the hope that construction and engineering costs — which have soared in recent years — will come down as the industry expansion slows.”

…

“The steep drop in oil and natural-gas prices already has had a dramatic effect on companies that are smaller and have a weaker financial position than the global oil titans. These smaller companies, mainly producers focused on natural gas or high-cost production projects such as Canada’s oil sands, already have slashed capital spending to make sure they aren’t spending more than operations bring in. That is a departure from recent years, when many of the companies spent heavily and relied on debt and equity markets to provide additional cash.”

Above all, we must not give up hope. I like any perspective on the economic crisis that introduces an element of hope. As a psychologist, my take on this phenomenon is that it is psychological, based on fear.

The loss of the economy, as we knew it prior to this recent crash, involves a grieving process that I believe will culminate with recovery.

The catalyst for that recovery is hope. Follow the message contained in these songs and you’ll understand what I mean.

quote: In the same article, the Houston Chronicle shows us an alternate view from economist Dana Johnson of Comercia Bank. She points out that Houston is less susceptible because our housing market is not as artificially inflated compared to the rest of the country.

Gary, My apologies to Dana! I will trust you on this one. I suppose now we have to start fact checking on all Dana’s, Pat’s, Alex’s and other epicene names. I’ve edited the posting. We’ll hope that you’re correct!